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LCB Fires Back, Lobs Accusations At Wholesalers

SNOW HILL — Liquor
Control Board for Worcester County (LCB) officials lashed out against the
state’s wholesalers this week, saying that wholesalers are as much to blame as
the licensees for the current campaign to get them abolished.

“It’s ironic that in
every case where we are getting accused of doing something wrong or illegal, we
were charging low prices,” said LCB Chairman Don Hastings at this week’s
meeting. “That tells me that the wholesalers in Baltimore are the ones who are
the most mad at us, because they are losing all the money.”

Allegedly, a $5 per
bottle Stoli promotion in March, a product that the LCB gets direct from
supplier William Grant and Sons, sparked widespread accusations of wrongdoing
from licensees who claimed the LCB didn’t offer the promotion to all licensees,
as required by state law, and an ongoing investigation from the State
Comptroller’s Office.

In recent years, the LCB
has been actively pursuing direct purchasing as one of its main business
tactics, Board members say, in efforts to save money for the county’s 187
licensees.

The LCB estimates that
more than half of its total liquor purchasing is direct from the suppliers,
which is a huge increase from just a few years ago, when the majority of the
LCB’s purchasing came from wholesalers.

Based on the state’s
three-tier system, liquor suppliers must sell their products to wholesalers,
who in turn sell to licensees.

In Worcester County, as
well as Somerset, Wicomico, and Montgomery counties, with the presence of a
county run dispensary, which holds the monopoly and forces all licensees to
purchase all liquor through the dispensary, the wholesalers and the LCB are on
the same tier level, and seemingly compete against each other for the business
of the licensees, despite the LCB’s monopoly.

This creates an added
mark-up cost for licensees in Worcester County, who must pay not only the
wholesale price, but also the LCB’s markup at the point of sale, which has
risen dramatically in the last two months (an average of 26% after being as low
as 18% last year).

To combat this extra
markup, according to LCB Executive Director Brian Sturgeon, the LCB had gone
the route of purchasing more products direct to help the licensees, despite the
fact that LCB officials claim to make less money on those products they get
direct.

“The fact that we
lowered our prices so much probably cost us $500,000, and that’s not an
official number, but a good estimate,” said Sturgeon. “The towns and the
counties who expect money from us should be upset because we were giving money
back to the licensees when we should have been giving it back to the towns. Our
mission now is back to where it was before and that is to help the county, and
that’s why our prices are back to where they were in 2006.”

With that said, LCB
spokesperson and Board member Larry Wilkinson did say that the organization
will more than likely scale back its pursuit of direct purchasing for the
foreseeable future.

“I don’t think we will
actively be pursuing as much direct products until we get a feel for what is
going to happen [with the pending investigations],” said Wilkinson. “If we are
going to be abolished, we don’t want to be sitting on a year’s worth of
inventory and have to sell it for pennies on the dollar. It will be a
management-related business decision to not increase any direct business or
inventory.”

Just as licensees claim
that the LCB has been gouging them on invoices for the past several months,
since the monopoly elected to raise the markups on liquor 4% in December of
2009, and again in June, the LCB believes that the state’s wholesalers are just
as angry for the amount of business the LCB’s direct purchasing strategy has
cost them.

“I think that some of
the licensees in Ocean City are being pushed by the wholesaler reps from
Baltimore because we’ve eaten into their market share,” said Sturgeon. “We took
Stoli away from a major distributor and that was a huge deal. It put tremendous
pressure on Absolut, because we are charging a lower price for Stoli now.
Absolut used to sell two to three bottles to every one bottle of Stoli, and now
it’s 1 to 1.”

Although the Worcester
County LCB has increased direct purchasing, revenues given back to the county
have gone down substantially (dipping from 777,000 in 2008 to $415,000 in 2009,
to $110,000 in 2010), while still predominantly holding the line on total gross
revenue ($14.7 million and $14.6 million in 2008 and 2009, respectively).

Wicomico County and
Somerset Counties reportedly do zero
direct purchasing and have given back a higher percentage of their gross
profits back to their respective counties than Worcester in each of the past
three years, despite making far less than half in combined total revenue than
Worcester County alone.

Still, Sturgeon says
that the LCB has realized its mistake in offering the low prices to licensees
for the last three years, but says the real story should be about how the
dispensary fought hard for those low prices.

“The real story in all of
this, is that a little dispensary in Snow Hill beat out two giant national
distributors and we’ve chipped away at their products and presented and

promoted them in a way that saved our licensees a lot of money”, said Sturgeon. “We are now at a point where we are

competing with and in some cases, beating the biggest distributors in the
country in this market.”

However, a look at the
comparison in prices between Wicomico and Worcester counties when the LCB
claims to have begun its price reduction for county licensees still shows that
the mark-up for products was still higher than the mark-ups being charged in
Wicomico County.

Based on September 2008
numbers, according to public state records, a 1.75 liter bottle of Absolut was

$46.99 in Worcester County, but available for $38.99 in Wicomico. By law, both dispensaries would have had to

purchase the bottle for the same wholesale price, before marking it up.

In comparison, the same
size bottle of Grey Goose Vodka cost $67.99 in Worcester versus $62.99 in Wicomico.

In March of 2008, when
the LCB had an average markup of 24%, the Worcester LCB was still charging
several dollars more than Wicomico at both the retail level and to its
licensees.

For example, a bottle of
Dewar’s Scotch cost $5.50 more in Worcester than it did in Wicomico for a 1.75
L bottle, as well as $5 more for the same size of Grey Goose, and $3 more for a
bottle of Tanqueray Gin.

The LCB dropped its
mark-up to 18% in March of 2009, which Board members say was one of the main
reasons their revenues dropped so substantially. As a result, they raised their
markups in December of 2009 by 4%, and then totally revamped their pricing
structure in June of 2010, to no longer go by the Maryland Beverage Journal
pricing, but rather, by 85% of the retail price for wholesalers, which is
allowable by law.

This new structure has
made mark-ups fluctuate from 26% to as much as 70% in some cases, making
licensees uncertain of what their liquor costs are going to be from week to
week.

Still, the LCB claims
that the struggle on the second tier of the system between the LCB and the
wholesalers is only hurting the licensees.

“If the licensees of
this county would just go with us and let us get all the products direct, they
could have the cheapest prices for liquor in all of America,” said Hastings.
“This county would be a destination to come and buy liquor because we don’t
mark up our prices like other places. These wholesalers have been around for a
long time and they do a lot of favors for licensees, especially those who buy a
lot of liquor.”